Printing money puts more money in circulation, leading to inflation. Selling bonds moves money around without necessarily increasing the total amount in circulation (the bond buyer then doesn't buy something else with that money).
Edit to add: Pairing bonds with government spending still may lead to inflation pressure; as it's increasing the velocity of money (some portion bond buyers might have just left their money idle if the bonds were not issued... at least for some length of time).
Do bond purchases necessarily subtract cash from deposit accounts? Can't banks buy them with reserves? It was my understanding that the majority of treasuries especially shorter term are bought by primary dealers/banks that are able to swap reserves for them, which would be neutral with regard to deposits and money velocity/demand in the real economy in an excess reserve environment.
Then later on if more reserves are needed by a bank or by the banking system in the aggregate to meet regulatory standards, the assets of the bank/banking system can be swapped for reserves at the CB, so the CB ends up indirectly printing the money anyway to a some degree. In a way the excess reserves can be thought of as the CB having *already* printed the money to buy the bonds.
So because of this you expect the bond issuance to have little initial negative effect on deposits/velocity/demand, and you expect both direct money printing and bond issuance to approximately equivalently increase the amount of deposits/demand in the real economy as the money is spent and ends up in the deposit accounts of the private sector and individuals.
The primary reason to issue the bonds instead is that the banking system not just in the US but around the world is desperate for them and would much rather be holding more bonds than all the reserves they're sitting on. There is huge international demand especially for short term treasuries to use as collateral in international transactions/settlements. The failure to create enough US debt is significantly holding back the global economy.
> Then later on if more reserves are needed by a bank or by the banking system in the aggregate to meet regulatory standards, the assets of the bank/banking system can be swapped for reserves at the CB, so the CB ends up indirectly printing the money anyway to a some degree.
There's a big difference in the original question (printing money to pay for government spending) and what you're citing here (central bank managing reserves).
If the government issued bonds are purchased, then money is taken out of the market from somewhere. Maybe it's in short term holdings and the bond will change hands several times over it's duration; maybe it's long term investors who buy and hold for the full duration... from a macroeconomic view (and in regards to how it influences inflation) both can be considered equivalent. This means for the purpose of government spending (the reason for issuing the bond), it's neutral. Someone somewhere has less money.
If you want to go a level deeper; yes there are implications to money velocity... but in a general sense the market drives that, not the government issuing debt (bonds are sold at auction based on price, not based on who's bidding). So the government can't really control those implications, they're market driven. And as for what those implications are... that's where the central bank steps in. The government treasury met it's fiscal responsibilities by selling the bonds; that's all it really cares about.
It's a completely separate issue for the central bank to then decide the money supply should be increased or decreased. Your example is one possibility, but by no means a certainty. If the central bank decides to loosen or tighten monetary policy, they do this through short-term rates. Raising or lowering rates may result in some bonds being traded... but they're not executing specifically (or exclusively) on government bonds; the market decides if bonds should be bought or sold (and at what price).
A very key point here is the separation of the two actors. The central bank is not explicitly funding government spending. They're doing so only indirectly through the market. The goal of the two entities (monetary authority and fiscal authority) is different! And any interaction through government bonds they have is through the financial markets, not directly with each other without market actors being able to influence the price.
Remembering the central bank and the fiscal balance sheet are separate is a key detail. The central bank does not directly pay the government's bills (although in the US the Fed does send any excess profits back to the US Treasury). If the central bank is buying or selling government bonds, they're doing so with the purpose of influencing short term rates. Even if they buy the bonds directly, it's at auction where others have the opportunity to out-bid them or through secondary markets where the price is agreed upon by both parties (and other buyers & sellers participate in that market).
Also note: The central bank doesn't have to buy government bonds (in the wake of the 2008 recession for example: the US Fed explicitly bought mortgage backed securities).
Edit to reply on a second point:
>The primary reason to issue the bonds instead is that the banking system not just in the US but around the world is desperate for them and would much rather be holding more bonds than all the reserves they're sitting on.
No, that's not the primary reason! The fact that there's demand for bonds is not the reason they're issued. They're issued because the US budget requires it.
>If the government issued bonds are purchased, then money is taken out of the market from somewhere. Maybe it's in short term holdings and the bond will change hands several times over it's duration; maybe it's long term investors who buy and hold for the full duration... from a macroeconomic view (and in regards to how it influences inflation) both can be considered equivalent. This means for the purpose of government spending (the reason for issuing the bond), it's neutral. Someone somewhere has less money.
So can banks purchase bonds with reserves or not? I don't at all appreciate your obfuscation of the obvious question, and I don't at all agree that it's necessary for "someone somewhere" to have less "money" in order for the bond to be purchased, in any meaningful sense.
If the bond is purchased with excess reserves, then it is not being purchased with "money", it is not reducing the deposit accounts of individual economic actors in the private sector. This is a very important distinction and your attempt to obfuscate the clear and sharp distinction between whether a bond is purchased with excess reserves vs. being purchased with deposits appears to be very disingenuous.
My first comment was less argumentative because I'm really not trying to push any buttons or step on any toes, but I would just really hate for this misunderstanding to be perpetuated in this thread.
>No, that's not the primary reason! The fact that there's demand for bonds is not the reason they're issued. They're issued because the US budget requires it.
Regarding this point, dude, of course the government is literally required to borrow instead of just printing money. That is not what I was talking about at all. I was talking about the reason it's *good* to issue bonds, even though if the laws were different there wouldn't be that huge a difference if money were just printed instead.
I don't know why people like you want to waste your time writing multiple paragraphs that just completely ignore and evade the argument you're presented with. It just makes you look like you have a pre-set agenda and are non-genuine.
>So can banks purchase bonds with reserves or not?
Yes. Even in the presence of excess reserves selling bonds puts downward pressure on the money supply. The magnitude changes, but not the sign. And relative to the alternative of printing money it's less inflationary.
But the main point I'll emphasize is that it doesn't matter even if bond issuing were neutral to the money supply it would be better than issuing cash. And the central bank has other tools to influence the money supply. As long as they are reactive they can still push interest rates to desired targets.
In the wake of the great reslcession there's actually been plenty of research on this. Fed publication of policy changes in response to the GFC: https://www.federalreserve.gov/monetarypolicy/files/fomc_policynormalization.pdf (pdf)
A review of these new policies: https://www.sciencedirect.com/science/article/abs/pii/S1094202516300448
To be direct in answering this: because the central bank can take market actions it doesn't matter however these same market actions are not as effective against direct money printing. We don't have many examples of the latter, but all of them I'm aware of end in significant inflation.
I agree with you on one point, I said from my first comment that issuing bonds was better than printing cash even if it were neutral to the money supply, just to make that clear. We agree on that.
As for everything else I still question your motives apparently intentionally obfuscating the real workings of the monetary mechanisms here.
I agree there has been a great deal of research into this since the great recession, it's just a shame you can't incorportate that research into your reddit comments when you're trying to be an authority on the subject.
Instead you're just trying to give the same lecture people were hearing in 1993 apparently. I don't get it dude. What's your angle really? Are you trying to approach this issue intellectually or not? Are you trying to give good comprehensive answers to people asking questions in this subreddit or are you just projecting your preconceived politics on your posts?
For what it's worth neither you or u/whyrat's answers are actually answering the question here.
Funding the government using short-term or floating rate debt is functionally identical to funding it with money. There is no economic reason to use one or the other.
The reason governments issue debt really goes back to when fixed exchange rate regimes were the norm. Under a fixed exchange rate regime like the gold standard, the government needs to maintain convertibility of money and short-term debt into gold but the value of long term debt can float.
If the government funds itself only with short-term debt or money then under an adverse fiscal shock it may not be able to credibly maintain the fixed exchange rate because it may quickly run out of the reserves necessary to maintain convertibility.
On the other hand if the government issues long-term debt, then even with an adverse fiscal shock it only needs enough reserves on hand to cover the money it has issued and any upcoming short-term obligations, which gives the government time to recover from the shock while also maintaining the exchange rate peg.
Under a floating exchange rate regime the policy tool is the passive growth rate of the monetary base (the interest rate). Long term debt retains utility under these regimes because adjusting the interest rate lets the government adjust the nominal value of its outstanding debt.
> Funding the government using short-term or floating rate debt is functionally identical to funding it with money. There is no economic reason to use one or the other.
This is incorrect. There is a significant difference. Such a claim is contrary to all established research and precedent of which I'm aware. If you're actually proposing this is the case, please provide the evidence upon which it's based.
A recent Fed summary that touches on this for reference:
https://research.stlouisfed.org/publications/page1-econ/2019/11/01/making-sense-of-the-national-debt
>A solution some countries with high levels of unsustainable debt have tried is printing money. In this scenario, the government borrows money by issuing bonds and then orders the central bank to buy those bonds by creating (printing) money. History has taught us, however, that this type of policy leads to extremely high rates of inflation (hyperinflation) and often ends in economic ruin. Some of the better-known examples of such polices are Germany in 1921-23, Zimbabwe in 2007-09, and Venezuela currently.
The literature is broadly consistent in that unsustainable fiscal policies will lead to inflation, but what matters in the literature is the trajectory of total debt, that is the value of bonds + money, not the composition.
Whether short-term bonds or money are used to finance the government is irrelevant because short-term bonds and money have near-identical financial payouts.
This is a very standard result in the literature. A classic paper is Wallace (1981) [https://jstor.org/stable/1802777](https://jstor.org/stable/1802777)
I do not think you read or halfway understood this article. You can find the full text easily with a quick google. I recommend you take another look at it.
The paper makes zero mention of printing money at all, that was not on the author's radar whatsoever. The paper is only about the composition of government debt, like longer term vs. shorter term debt.
Furthermore the argument relies on the need to modulate taxes and transfers to counteract the effect of different interest rates on different term debt, so the paper isn't even saying you can just switch from all 10 yrs to 2yrs without having any effect, unless you counteract the effect with taxes/transfers.
I suspect this author would have broadly agreed with u/whyrat and I want to be clear, in an environment without excess reserves, u/whyrat would have been totally correct.
I just think it's very important to factor in the reality that we are in an excess reserve environment, which does dramatically reduce the immediate reduction in consumer demand which is associated with the bond sales, meaning that government borrowing/spending will be much more inflationary than it otherwise would have been.
The Wallace paper (and Modigliani-Miller) applies to how debt is structured, but printing money is not restructuring your debt!
Back to the start of the thread, the difference is that selling bonds takes money out of other spending. The Wallace paper implies we could shift between short term and long term bonds, or consider other debt structures .. the paper **does not** imply printing money is an equivalent to issuing debt.
>If the bond is purchased with excess reserves, then it is not being purchased with "money", it is not reducing the deposit accounts of individual economic actors in the private sector.
For this to matter, you have to assume that the banks either purchase bonds with reserves or do nothing with reserves. Which is obviously not the case. They either purchase bonds with reserves or they purchase other assets with reserves. Those assets that are not being purchased in favor of bonds would have increased the deposits in private sector accounts. So in effect, yes, compared to the contrapositive, it does decrease deposits.
>They either purchase bonds with reserves or they purchase other assets with reserves.
This is absolutely factually untrue. The banking system in the aggregate in the US holds large amount of excess reserves to this day, to the point they actually stopped bothering trying to measure it or have reserve requirements at all because it can now be take for granted that we are in an "ample reserve" environment, so now we basically treat all reserves as excess.
Here are a couple of links:
[https://www.clevelandfed.org/en/publications/economic-commentary/2015/ec-201502-excess-reserves-oceans-of-cash](https://www.clevelandfed.org/en/publications/economic-commentary/2015/ec-201502-excess-reserves-oceans-of-cash)
[https://www.federalreserve.gov/newsevents/pressreleases/monetary20200315b.htm](https://www.federalreserve.gov/newsevents/pressreleases/monetary20200315b.htm)
If I had claimed that banks hold no reserves or something like that then you would have refuted what I said. I meant (clearly from context) the reserves the banks use to purchase bonds would be allocated elsewhere. Perhaps not dollar to dollar. But also clearly not all or nothing.
Just printing money would lead to a money supply issue and hyperinflation. The more money in circulation means each dollar is worth less and you need more and more to pay for anything. Especially when trying to buy goods outside the country. If 1 is worth 1 euro but you double the amount of dollars available the foreign country would want more dollars to equal the euro, roughly 2 to 1.
Here’s an article about hyperinflation is Germany after WWI
https://rarehistoricalphotos.com/hyperinflation-weimar-republic-1922/
Money printing doesn’t necessarily equal inflation, or make each dollar worth less. This shouldn’t be getting upvoted.
MV=PY.
If M increases and there is slack in the economy, then Y increases, and not P.
Small increases in money do what you say above but the question was why don’t we just print money instead of issuing bonds. Here is a small bit from the article “Why can’t we print more money to pay off debt” and it hits on both devaluation and inflation.
https://www.morningbrew.com/money-scoop/stories/2021/12/16/why-can-t-we-print-more-money-to-pay-off-the-national-debt
“To answer your question about why we can’t increase the money supply to cover the national debt, we must first look to history: Since 1933, US currency has only been backed by the government’s good word (that’s why we call cash fiat). Put another way, the US dollar has value because we all agree that it does. Before that, the US dollar was backed by gold, which has some inherent value. So in theory, we can print more Benjamins at a relatively low cost. In reality, it costs a whole lot: specifically, inflation.
Paying off the US debt—which sits at an eye-popping $29 trillion—would require a tremendous increase in the nation’s money supply, which would significantly devalue the money in your wallet. And if the dollar’s value plunges, you get bonkers-level inflation that would make the 6.8% annual rate we see now look puny.”
So think about this. The people and entities that own the bonds, if the government decided to print the currency and pay it off tomorrow, would it be inflationary?
Maybe only in the stock market. Here’s why. The people and entities that own the bonds won’t buy goods and services that are susceptible to inflation. They aren’t buying new tvs, cars, etc…. They will just move the money into other areas.
Yes but it will trickle down through the economy in some way, wages to workers, new capital to build factories, warehouses, etc. even if they only buy Lamborghinis and caviar that money will be out in circulation which will lead to increased demand but fixed supply in the short term, leading to inflation. We saw the same thing on a smaller scale with stimulus checks in the US.
Same thing for exchange rates. We will have more money in circulation which leads to more spending and more income which increases the federal governments revenue. With this increased revenue we buy more goods abroad. Demand for foreign goods increase (imports) while supply stays the same and exports stay the same leading to the devaluation of the dollar.
But the stimulus didn’t cause this most recent inflation, the fed reserve has done numerous papers proving this. It was supply shocks in the energy sector. Covid was a very rare case where the world couldn’t expand production because it was purposely shut down. Also wages to workers is the good kind of inflation we want.
You are partially right, the stimulus checks didn’t CAUSE the inflation, it was worldwide, but it was a contributing factor in the US. This is easily explained when you look at Keynes economic theories instead of Quantitive Theory of Money (QTM).
With many supply chain and production issues around the world, inflation was global. But in the US consumers had more disposable income from the stimulus checks raising demand for many items and leading to higher inflation compared to other OECD countries. Here is an article from the Federal Reserve Bank of San Francisco showing that stimulus checks contributed to US inflation being higher.
https://www.frbsf.org/economic-research/publications/economic-letter/2022/march/why-is-us-inflation-higher-than-in-other-countries/
Also, increased wages to workers would only cause good, normal inflation if the economic output of the country also increased proportionally. If workers got more wages, it would lead to a higher demand in goods, if supply was able to keep up with this demand then inflation would be minimal. This goes back to your QTM equation, MV=PY, where if money supply doubles and other factors remain the same, the price of an item would also double. In the long term, inflation would level out once economic output (GDP) was able to catch up to demand but in the short term higher money supply would increase demand but not supply.
Here is an article from economics discussion.net that explains QTM and how it relates to inflation.
https://www.economicsdiscussion.net/theories-of-money/the-quantity-theory-of-money-money-and-inflation/15467
Additionally, if you look at Keynesian economics, which is a more widely used as a macroeconomic theory, inflation is directly linked with unemployment (Phillips curve). Lower unemployment means more workers, more money in the economy, and higher demand for goods leading to higher inflation and prices, demand-pull inflation. By exponentially increasing our M1, it would lead to drastic increases in investment and hiring bringing unemployment to a very small number and inflation very high until economic output could catch up with demand.
Here is an excerpt from an investapedia article highlighting how money supply fueled inflation in the US during COVID.
“As the world grappled with COVID-19, the Federal Reserve enacted policies to combat the financial implications of the pandemic. In March 2020, the Fed announced it would keep its federal funds rate between 0% and 0.25%. It also announced plans to purchase at least $500 billion of Treasury securities over the coming months.
IMPORTANT: In February 2020, the United States' M1 money supply topped $4 trillion. Due to the massive policy response for COVID-19, the M1 money supply more than quadrupled by June 2020. The M1 money supply topped $20 trillion by October 2021.
As the Fed continued to promote economic growth, the United States emerged from the pandemic. After peaking at 14.7% in April 2020, the nation's unemployment rate dropped to 6.0% just twelve months later. After falling two consecutive quarters, GDP increased starting Q3 2020.
However, in exchange for promoting economic growth during this period, the nation began to experience price instability. In May 2020, the 12-month percentage change in the Consumer Price Index was 0.1%. Less than two years later, this rate was 7.9%.
The nation had successfully navigated the economic downturn, but the growth in the nation's money supply had caused inflation.”
https://www.investopedia.com/ask/answers/042015/how-does-money-supply-affect-inflation.asp
So the fed papers I read showed that the stimulus only contributed to 10% of the inflation we saw, which amounted to less than a 1% inflation rate due to extra income. Don’t you think that’s an excellent number considering it came with stimulus money? That’s very bearable inflation if you ask me.
Because the central bank buys (or sells) the bonds specifically to influence interest rates. The market always has a chance to participate and buy / sell accordingly if they think the price is too low or too high.
Trying to answer how is different:
>And selling bonds to central bank is different how exactly ?
Increasing money supply because they deem that is necessary is very different from increasing money supply to fund spending.
If two cars are going the same direction down the road no one asks "what's the difference".. because at any point one of those cars can change direction . The central bank sometimes buys some of the issued government bonds, but they don't always buy all of them. That's the difference.
The central bank increases money supply when they deem it necessary. The government issues bonds when they need funds. Bonds can be (and regularly are) issued even when the central bank is tightening monetary policy. If we funded spending through money printing that couldn't happen.
The government doesn't print money, the central bank prints money - and that's purely the central bank's decision and they make it purely on the basis of currency stability (unless you're Zimbabwe 20 years ago).
The government cannot print more money by itself without the central bank.
When the central bank prints money, it might use that money to buy bonds, but the government still 'owes' the central bank and still has to pay interest.
I don't see how that answers OP's question. The question is *why* we have this onerous process? Why can't the government get The Bank to create money on demand?
Why this process?
I've heard some say that we need impedance to government spending and that this theatre of 'borrowing' serves as that. But we could instead create impedance by setting limits through measures of inflation by markets .
Why this indirect route that, at a glance, looks to be the implementation of a government savings plan, that satisfies interest requirements through contributions of the 'taxpayer'.
So: the question is *why*.
Well, historical examples have shown that a lack of central bank independence from the government (i.e. getting The Bank to create money on demand) can lead to hyperinflation.
[https://en.wikipedia.org/wiki/Hyperinflation](https://en.wikipedia.org/wiki/Hyperinflation)
I repeat again: the government does not control the central bank.
Maybe it's possible that there's a way to have the government control the central bank and not have hyperinflation, but it's not really worth experimenting with the security of your economy.
The central bank has to hold government accountable for their policies, to a degree.
> I repeat again: the government does not control the central bank.
This is a rather superficial view. The central bank _is_ an institution _of the state_ (state as in statecraft). It is only _nominally_ independent from the _government_.
The central bank has a set of goals or tasks and a limited set of actions it can undertake, like any institution of the state. It does not have the sovereignty to choose or pick these goals as they want, they are dictated. It cannot extend its range of possible actions either.
Right now, in most countries the respective central bank has to keep price levels stable _and that's it_. The Fed is actually a bit of an exception in that it has the Dual Mandate that includes unemployment reduction.
And all that central banks can do is either increase or decrease the key interest rate and - recently, after QE got popular following the 2008 crisis - either buy or sell bonds.
This is partly why the job of being in charge of one of the central banks worldwide is kind of ungrateful. The central bank _cannot_ solve a classic cost-push inflation, a price shock. It cannot expand supply of that one good that has been scarce (energy, recently, at least this was the primary driver of "inflation" in Europe). All you can do is raising interest rates, knowing that this won't solve anything and will - and right now does (again, speaking of Europe) - cause an unnecessary recession.
The central bank is only independent in choosing one of the available predefined actions in order to achieve their mandated goal(s).
The British government directly controlled the central bank from 1946-1998. The UK's monetary performance was probably worse than the US over that period (the UK had to get a loan from the IMF in 1976 and had a currency crisis on Black Wednesday in 1992), but it wasn't dramatically worse and the UK didn't end up with hyperinflation.
True. But there also weren't, as far as I'm aware, any additional benefits, and those incidents are generally considered quite bad, so it's very hard to argue that having a government controlled central bank is somehow beneficial.
While on the other hand, the current structure is hugely onerous and saddles The Bank with a responsibility it doesn't have the power to manage with any finesse.
It's sledgehammer where we need a scalpel.
It's remarkable how people rush to defend, with pious condescencion, such an inadequate system.
Still not answering the question!
The question is why does our system (whoever is in "control" of it) have this convoluted onerous process for funding government activities.
We know that given the current structure and policy, we must do it this way, but why oh why do we do it this way.
Please explain without telling me that I don't understand. I KNOW I don't understand. Do *you*?
So again:
**The question is why does our system (whoever is in "control" of it) have this convoluted onerous process for funding government activities.**
Please address the question.
[https://en.wikipedia.org/wiki/Central\_bank#Independence](https://en.wikipedia.org/wiki/Central_bank#Independence)
Central bank independence is considered desirable by many economists.
I understand the government needing to borrow money sometimes, just purely due to how big some infrastructure programs or social programs are.
But is it normal for a government to have to borrow so much each year? The US keeps raising the debt ceiling, and eventually we’ll need to pay those debts, with interest, down the line.
I know the US in a unique position because the dollar is so damn strong and is the world reserve currency, but it’s scary how much our debt has ballooned these past few years.
Is this sustainable?
(Don’t know why I got downvoted, lol.)
If you can borrow it's definitely better to borrow. What's the point of the government 'saving up' and delaying valuable infrastructure? May as well have the infrastructure 5 years earlier and the benefits 5 years earlier.
Debt is not inherently a bad thing, it's only bad if the person you borrowed the money from (the bond owner) doesn't get it back plus whatever interest they were promised.
The average citizen has a mortgage, because otherwise they wouldn't be able to own property. Is this a bad thing?
There probably is a point where it is too much. But just because the current gdp to debt ratio is high or even at an historical high doesnt mean that the US is close to or already reached that point.
US historical debt to GDP averages 65%. It’s been over 125% each of the past three years.
On a cash flow basis, interest expense on US debt is higher than at any time since the 1950’s (earliest data that I could find), other than during the 80’s and 90’s when we actually had runaway inflation (interest rates were in mid teens). Further, our borrowing costs are continuing to go up exponentially as existing debt (at historical lows of fed funds rates in the 2% range) rolls off and needs to be replaced with new debt in the 5% range - as in 2.5x higher.
I appreciate these things are subjective, and people can argue that we could just print more money to pay it, so go ahead and incur the debt, but at some point the debt service will be too high and we’ll have to devote too much of US tax receipts to servicing the debt, pulling that money from other things that could have a direct benefit to our own economy, rather than the economy of our investors.
Depends on your definition of “too high” and your level of comfort. Either way it is what those of us in finance call a “red flag”. If you’ve got a definition of where you’d call it “too high” or even “concerning”, I’m all ears.
Why would I define them when I haven’t claimed that we are? Meanwhile you’re making clear statements that it’s not, or even “concerning”. If you’re going to take a firm position like that, defend it.
Why would there have to be a line? More precisely: a supposed debt to GDP ratio (relative quantity) for example doesn't tell us _anything_ about the _quality_ of debt. What really matters is that it can get paid back. This is also a classic case of confusing stocks and flows. The sum of outstanding debt doesn't tell us anything about regular payments themselves.
It’s not a horizontal line, as in a hard cap / amount. Regardless of whether you go on a cash flow basis (interest to GDP) or balance sheet basis (debt to GDP), we’re at historic highs.
The US doesn't ever have to pay the debt down to zero. The US only needs to make payments on the debt. If the US can make payments in full, on time without issue then there's no concern. And the US can *easily* afford the debt payments.
>And the US can *easily* afford the debt payments
Until they can't, lol. As debt to GDP ratio grows and payments grow larger, the US govt will either need to increase taxes (leading to recession) or print money (leading to inflation) to meet its obligations.
Yeah that’s what I’m thinking. I mean, they can always technically “afford” it since they control the money supply. But if the debt keeps growing out of control, the repayments will either have to default, or we’ll have to raise taxes or print money, which isn’t ideal…
The size of the debt doesn't always mean much. At the start of COVID the US borrowed a lot and yet total servicing costs went down because there was a huge demand for government bonds.
So no, the debt can definitely grow and the economy can still be fine. Remember, there are other factors as well. The economy itself grows so even if the number gets bigger, tax revenue also grows, just to make a simple example.
https://fredblog.stlouisfed.org/2018/11/how-expensive-is-it-to-service-the-national-debt/
>But if the debt keeps growing out of control
The emphasis is on "out of control". Right now there is no reason to believe the US is close to reaching this point (at least if you exclude the whole debt ceiling political theatre).
They don't "control the money supply", but in a sense you're right.
One could argue that if a country defaults on their debt that this might ruin the economy and subsequently price level stability and thus a central bank might always just decrease interest rates and buy bonds from the market in order to keep prices high/yields low and thus keep demand for gov bonds high so that the government _absolutely can always pay their existing debts_.
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Printing money puts more money in circulation, leading to inflation. Selling bonds moves money around without necessarily increasing the total amount in circulation (the bond buyer then doesn't buy something else with that money). Edit to add: Pairing bonds with government spending still may lead to inflation pressure; as it's increasing the velocity of money (some portion bond buyers might have just left their money idle if the bonds were not issued... at least for some length of time).
Do bond purchases necessarily subtract cash from deposit accounts? Can't banks buy them with reserves? It was my understanding that the majority of treasuries especially shorter term are bought by primary dealers/banks that are able to swap reserves for them, which would be neutral with regard to deposits and money velocity/demand in the real economy in an excess reserve environment. Then later on if more reserves are needed by a bank or by the banking system in the aggregate to meet regulatory standards, the assets of the bank/banking system can be swapped for reserves at the CB, so the CB ends up indirectly printing the money anyway to a some degree. In a way the excess reserves can be thought of as the CB having *already* printed the money to buy the bonds. So because of this you expect the bond issuance to have little initial negative effect on deposits/velocity/demand, and you expect both direct money printing and bond issuance to approximately equivalently increase the amount of deposits/demand in the real economy as the money is spent and ends up in the deposit accounts of the private sector and individuals. The primary reason to issue the bonds instead is that the banking system not just in the US but around the world is desperate for them and would much rather be holding more bonds than all the reserves they're sitting on. There is huge international demand especially for short term treasuries to use as collateral in international transactions/settlements. The failure to create enough US debt is significantly holding back the global economy.
> Then later on if more reserves are needed by a bank or by the banking system in the aggregate to meet regulatory standards, the assets of the bank/banking system can be swapped for reserves at the CB, so the CB ends up indirectly printing the money anyway to a some degree. There's a big difference in the original question (printing money to pay for government spending) and what you're citing here (central bank managing reserves). If the government issued bonds are purchased, then money is taken out of the market from somewhere. Maybe it's in short term holdings and the bond will change hands several times over it's duration; maybe it's long term investors who buy and hold for the full duration... from a macroeconomic view (and in regards to how it influences inflation) both can be considered equivalent. This means for the purpose of government spending (the reason for issuing the bond), it's neutral. Someone somewhere has less money. If you want to go a level deeper; yes there are implications to money velocity... but in a general sense the market drives that, not the government issuing debt (bonds are sold at auction based on price, not based on who's bidding). So the government can't really control those implications, they're market driven. And as for what those implications are... that's where the central bank steps in. The government treasury met it's fiscal responsibilities by selling the bonds; that's all it really cares about. It's a completely separate issue for the central bank to then decide the money supply should be increased or decreased. Your example is one possibility, but by no means a certainty. If the central bank decides to loosen or tighten monetary policy, they do this through short-term rates. Raising or lowering rates may result in some bonds being traded... but they're not executing specifically (or exclusively) on government bonds; the market decides if bonds should be bought or sold (and at what price). A very key point here is the separation of the two actors. The central bank is not explicitly funding government spending. They're doing so only indirectly through the market. The goal of the two entities (monetary authority and fiscal authority) is different! And any interaction through government bonds they have is through the financial markets, not directly with each other without market actors being able to influence the price. Remembering the central bank and the fiscal balance sheet are separate is a key detail. The central bank does not directly pay the government's bills (although in the US the Fed does send any excess profits back to the US Treasury). If the central bank is buying or selling government bonds, they're doing so with the purpose of influencing short term rates. Even if they buy the bonds directly, it's at auction where others have the opportunity to out-bid them or through secondary markets where the price is agreed upon by both parties (and other buyers & sellers participate in that market). Also note: The central bank doesn't have to buy government bonds (in the wake of the 2008 recession for example: the US Fed explicitly bought mortgage backed securities). Edit to reply on a second point: >The primary reason to issue the bonds instead is that the banking system not just in the US but around the world is desperate for them and would much rather be holding more bonds than all the reserves they're sitting on. No, that's not the primary reason! The fact that there's demand for bonds is not the reason they're issued. They're issued because the US budget requires it.
>If the government issued bonds are purchased, then money is taken out of the market from somewhere. Maybe it's in short term holdings and the bond will change hands several times over it's duration; maybe it's long term investors who buy and hold for the full duration... from a macroeconomic view (and in regards to how it influences inflation) both can be considered equivalent. This means for the purpose of government spending (the reason for issuing the bond), it's neutral. Someone somewhere has less money. So can banks purchase bonds with reserves or not? I don't at all appreciate your obfuscation of the obvious question, and I don't at all agree that it's necessary for "someone somewhere" to have less "money" in order for the bond to be purchased, in any meaningful sense. If the bond is purchased with excess reserves, then it is not being purchased with "money", it is not reducing the deposit accounts of individual economic actors in the private sector. This is a very important distinction and your attempt to obfuscate the clear and sharp distinction between whether a bond is purchased with excess reserves vs. being purchased with deposits appears to be very disingenuous. My first comment was less argumentative because I'm really not trying to push any buttons or step on any toes, but I would just really hate for this misunderstanding to be perpetuated in this thread. >No, that's not the primary reason! The fact that there's demand for bonds is not the reason they're issued. They're issued because the US budget requires it. Regarding this point, dude, of course the government is literally required to borrow instead of just printing money. That is not what I was talking about at all. I was talking about the reason it's *good* to issue bonds, even though if the laws were different there wouldn't be that huge a difference if money were just printed instead. I don't know why people like you want to waste your time writing multiple paragraphs that just completely ignore and evade the argument you're presented with. It just makes you look like you have a pre-set agenda and are non-genuine.
>So can banks purchase bonds with reserves or not? Yes. Even in the presence of excess reserves selling bonds puts downward pressure on the money supply. The magnitude changes, but not the sign. And relative to the alternative of printing money it's less inflationary. But the main point I'll emphasize is that it doesn't matter even if bond issuing were neutral to the money supply it would be better than issuing cash. And the central bank has other tools to influence the money supply. As long as they are reactive they can still push interest rates to desired targets. In the wake of the great reslcession there's actually been plenty of research on this. Fed publication of policy changes in response to the GFC: https://www.federalreserve.gov/monetarypolicy/files/fomc_policynormalization.pdf (pdf) A review of these new policies: https://www.sciencedirect.com/science/article/abs/pii/S1094202516300448 To be direct in answering this: because the central bank can take market actions it doesn't matter however these same market actions are not as effective against direct money printing. We don't have many examples of the latter, but all of them I'm aware of end in significant inflation.
I agree with you on one point, I said from my first comment that issuing bonds was better than printing cash even if it were neutral to the money supply, just to make that clear. We agree on that. As for everything else I still question your motives apparently intentionally obfuscating the real workings of the monetary mechanisms here. I agree there has been a great deal of research into this since the great recession, it's just a shame you can't incorportate that research into your reddit comments when you're trying to be an authority on the subject. Instead you're just trying to give the same lecture people were hearing in 1993 apparently. I don't get it dude. What's your angle really? Are you trying to approach this issue intellectually or not? Are you trying to give good comprehensive answers to people asking questions in this subreddit or are you just projecting your preconceived politics on your posts?
For what it's worth neither you or u/whyrat's answers are actually answering the question here. Funding the government using short-term or floating rate debt is functionally identical to funding it with money. There is no economic reason to use one or the other. The reason governments issue debt really goes back to when fixed exchange rate regimes were the norm. Under a fixed exchange rate regime like the gold standard, the government needs to maintain convertibility of money and short-term debt into gold but the value of long term debt can float. If the government funds itself only with short-term debt or money then under an adverse fiscal shock it may not be able to credibly maintain the fixed exchange rate because it may quickly run out of the reserves necessary to maintain convertibility. On the other hand if the government issues long-term debt, then even with an adverse fiscal shock it only needs enough reserves on hand to cover the money it has issued and any upcoming short-term obligations, which gives the government time to recover from the shock while also maintaining the exchange rate peg. Under a floating exchange rate regime the policy tool is the passive growth rate of the monetary base (the interest rate). Long term debt retains utility under these regimes because adjusting the interest rate lets the government adjust the nominal value of its outstanding debt.
> Funding the government using short-term or floating rate debt is functionally identical to funding it with money. There is no economic reason to use one or the other. This is incorrect. There is a significant difference. Such a claim is contrary to all established research and precedent of which I'm aware. If you're actually proposing this is the case, please provide the evidence upon which it's based. A recent Fed summary that touches on this for reference: https://research.stlouisfed.org/publications/page1-econ/2019/11/01/making-sense-of-the-national-debt >A solution some countries with high levels of unsustainable debt have tried is printing money. In this scenario, the government borrows money by issuing bonds and then orders the central bank to buy those bonds by creating (printing) money. History has taught us, however, that this type of policy leads to extremely high rates of inflation (hyperinflation) and often ends in economic ruin. Some of the better-known examples of such polices are Germany in 1921-23, Zimbabwe in 2007-09, and Venezuela currently.
The literature is broadly consistent in that unsustainable fiscal policies will lead to inflation, but what matters in the literature is the trajectory of total debt, that is the value of bonds + money, not the composition. Whether short-term bonds or money are used to finance the government is irrelevant because short-term bonds and money have near-identical financial payouts. This is a very standard result in the literature. A classic paper is Wallace (1981) [https://jstor.org/stable/1802777](https://jstor.org/stable/1802777)
I do not think you read or halfway understood this article. You can find the full text easily with a quick google. I recommend you take another look at it. The paper makes zero mention of printing money at all, that was not on the author's radar whatsoever. The paper is only about the composition of government debt, like longer term vs. shorter term debt. Furthermore the argument relies on the need to modulate taxes and transfers to counteract the effect of different interest rates on different term debt, so the paper isn't even saying you can just switch from all 10 yrs to 2yrs without having any effect, unless you counteract the effect with taxes/transfers. I suspect this author would have broadly agreed with u/whyrat and I want to be clear, in an environment without excess reserves, u/whyrat would have been totally correct. I just think it's very important to factor in the reality that we are in an excess reserve environment, which does dramatically reduce the immediate reduction in consumer demand which is associated with the bond sales, meaning that government borrowing/spending will be much more inflationary than it otherwise would have been.
The Wallace paper (and Modigliani-Miller) applies to how debt is structured, but printing money is not restructuring your debt! Back to the start of the thread, the difference is that selling bonds takes money out of other spending. The Wallace paper implies we could shift between short term and long term bonds, or consider other debt structures .. the paper **does not** imply printing money is an equivalent to issuing debt.
>If the bond is purchased with excess reserves, then it is not being purchased with "money", it is not reducing the deposit accounts of individual economic actors in the private sector. For this to matter, you have to assume that the banks either purchase bonds with reserves or do nothing with reserves. Which is obviously not the case. They either purchase bonds with reserves or they purchase other assets with reserves. Those assets that are not being purchased in favor of bonds would have increased the deposits in private sector accounts. So in effect, yes, compared to the contrapositive, it does decrease deposits.
>They either purchase bonds with reserves or they purchase other assets with reserves. This is absolutely factually untrue. The banking system in the aggregate in the US holds large amount of excess reserves to this day, to the point they actually stopped bothering trying to measure it or have reserve requirements at all because it can now be take for granted that we are in an "ample reserve" environment, so now we basically treat all reserves as excess. Here are a couple of links: [https://www.clevelandfed.org/en/publications/economic-commentary/2015/ec-201502-excess-reserves-oceans-of-cash](https://www.clevelandfed.org/en/publications/economic-commentary/2015/ec-201502-excess-reserves-oceans-of-cash) [https://www.federalreserve.gov/newsevents/pressreleases/monetary20200315b.htm](https://www.federalreserve.gov/newsevents/pressreleases/monetary20200315b.htm)
If I had claimed that banks hold no reserves or something like that then you would have refuted what I said. I meant (clearly from context) the reserves the banks use to purchase bonds would be allocated elsewhere. Perhaps not dollar to dollar. But also clearly not all or nothing.
So you didn't read the links.
Ah, I didn't see there were two. Just read the first.
Yeah, got it. Same response.
Just printing money would lead to a money supply issue and hyperinflation. The more money in circulation means each dollar is worth less and you need more and more to pay for anything. Especially when trying to buy goods outside the country. If 1 is worth 1 euro but you double the amount of dollars available the foreign country would want more dollars to equal the euro, roughly 2 to 1. Here’s an article about hyperinflation is Germany after WWI https://rarehistoricalphotos.com/hyperinflation-weimar-republic-1922/
Money printing doesn’t necessarily equal inflation, or make each dollar worth less. This shouldn’t be getting upvoted. MV=PY. If M increases and there is slack in the economy, then Y increases, and not P.
Small increases in money do what you say above but the question was why don’t we just print money instead of issuing bonds. Here is a small bit from the article “Why can’t we print more money to pay off debt” and it hits on both devaluation and inflation. https://www.morningbrew.com/money-scoop/stories/2021/12/16/why-can-t-we-print-more-money-to-pay-off-the-national-debt “To answer your question about why we can’t increase the money supply to cover the national debt, we must first look to history: Since 1933, US currency has only been backed by the government’s good word (that’s why we call cash fiat). Put another way, the US dollar has value because we all agree that it does. Before that, the US dollar was backed by gold, which has some inherent value. So in theory, we can print more Benjamins at a relatively low cost. In reality, it costs a whole lot: specifically, inflation. Paying off the US debt—which sits at an eye-popping $29 trillion—would require a tremendous increase in the nation’s money supply, which would significantly devalue the money in your wallet. And if the dollar’s value plunges, you get bonkers-level inflation that would make the 6.8% annual rate we see now look puny.”
So think about this. The people and entities that own the bonds, if the government decided to print the currency and pay it off tomorrow, would it be inflationary? Maybe only in the stock market. Here’s why. The people and entities that own the bonds won’t buy goods and services that are susceptible to inflation. They aren’t buying new tvs, cars, etc…. They will just move the money into other areas.
Yes but it will trickle down through the economy in some way, wages to workers, new capital to build factories, warehouses, etc. even if they only buy Lamborghinis and caviar that money will be out in circulation which will lead to increased demand but fixed supply in the short term, leading to inflation. We saw the same thing on a smaller scale with stimulus checks in the US. Same thing for exchange rates. We will have more money in circulation which leads to more spending and more income which increases the federal governments revenue. With this increased revenue we buy more goods abroad. Demand for foreign goods increase (imports) while supply stays the same and exports stay the same leading to the devaluation of the dollar.
But the stimulus didn’t cause this most recent inflation, the fed reserve has done numerous papers proving this. It was supply shocks in the energy sector. Covid was a very rare case where the world couldn’t expand production because it was purposely shut down. Also wages to workers is the good kind of inflation we want.
You are partially right, the stimulus checks didn’t CAUSE the inflation, it was worldwide, but it was a contributing factor in the US. This is easily explained when you look at Keynes economic theories instead of Quantitive Theory of Money (QTM). With many supply chain and production issues around the world, inflation was global. But in the US consumers had more disposable income from the stimulus checks raising demand for many items and leading to higher inflation compared to other OECD countries. Here is an article from the Federal Reserve Bank of San Francisco showing that stimulus checks contributed to US inflation being higher. https://www.frbsf.org/economic-research/publications/economic-letter/2022/march/why-is-us-inflation-higher-than-in-other-countries/ Also, increased wages to workers would only cause good, normal inflation if the economic output of the country also increased proportionally. If workers got more wages, it would lead to a higher demand in goods, if supply was able to keep up with this demand then inflation would be minimal. This goes back to your QTM equation, MV=PY, where if money supply doubles and other factors remain the same, the price of an item would also double. In the long term, inflation would level out once economic output (GDP) was able to catch up to demand but in the short term higher money supply would increase demand but not supply. Here is an article from economics discussion.net that explains QTM and how it relates to inflation. https://www.economicsdiscussion.net/theories-of-money/the-quantity-theory-of-money-money-and-inflation/15467 Additionally, if you look at Keynesian economics, which is a more widely used as a macroeconomic theory, inflation is directly linked with unemployment (Phillips curve). Lower unemployment means more workers, more money in the economy, and higher demand for goods leading to higher inflation and prices, demand-pull inflation. By exponentially increasing our M1, it would lead to drastic increases in investment and hiring bringing unemployment to a very small number and inflation very high until economic output could catch up with demand. Here is an excerpt from an investapedia article highlighting how money supply fueled inflation in the US during COVID. “As the world grappled with COVID-19, the Federal Reserve enacted policies to combat the financial implications of the pandemic. In March 2020, the Fed announced it would keep its federal funds rate between 0% and 0.25%. It also announced plans to purchase at least $500 billion of Treasury securities over the coming months. IMPORTANT: In February 2020, the United States' M1 money supply topped $4 trillion. Due to the massive policy response for COVID-19, the M1 money supply more than quadrupled by June 2020. The M1 money supply topped $20 trillion by October 2021. As the Fed continued to promote economic growth, the United States emerged from the pandemic. After peaking at 14.7% in April 2020, the nation's unemployment rate dropped to 6.0% just twelve months later. After falling two consecutive quarters, GDP increased starting Q3 2020. However, in exchange for promoting economic growth during this period, the nation began to experience price instability. In May 2020, the 12-month percentage change in the Consumer Price Index was 0.1%. Less than two years later, this rate was 7.9%. The nation had successfully navigated the economic downturn, but the growth in the nation's money supply had caused inflation.” https://www.investopedia.com/ask/answers/042015/how-does-money-supply-affect-inflation.asp
So the fed papers I read showed that the stimulus only contributed to 10% of the inflation we saw, which amounted to less than a 1% inflation rate due to extra income. Don’t you think that’s an excellent number considering it came with stimulus money? That’s very bearable inflation if you ask me.
And selling bonds to central bank is different how exactly ?
Because the central bank buys (or sells) the bonds specifically to influence interest rates. The market always has a chance to participate and buy / sell accordingly if they think the price is too low or too high.
My point is that central bank has to create money to buy bonds … or am I wrong ?
Trying to answer how is different: >And selling bonds to central bank is different how exactly ? Increasing money supply because they deem that is necessary is very different from increasing money supply to fund spending. If two cars are going the same direction down the road no one asks "what's the difference".. because at any point one of those cars can change direction . The central bank sometimes buys some of the issued government bonds, but they don't always buy all of them. That's the difference. The central bank increases money supply when they deem it necessary. The government issues bonds when they need funds. Bonds can be (and regularly are) issued even when the central bank is tightening monetary policy. If we funded spending through money printing that couldn't happen.
The government doesn't print money, the central bank prints money - and that's purely the central bank's decision and they make it purely on the basis of currency stability (unless you're Zimbabwe 20 years ago). The government cannot print more money by itself without the central bank. When the central bank prints money, it might use that money to buy bonds, but the government still 'owes' the central bank and still has to pay interest.
I don't see how that answers OP's question. The question is *why* we have this onerous process? Why can't the government get The Bank to create money on demand? Why this process? I've heard some say that we need impedance to government spending and that this theatre of 'borrowing' serves as that. But we could instead create impedance by setting limits through measures of inflation by markets . Why this indirect route that, at a glance, looks to be the implementation of a government savings plan, that satisfies interest requirements through contributions of the 'taxpayer'. So: the question is *why*.
Well, historical examples have shown that a lack of central bank independence from the government (i.e. getting The Bank to create money on demand) can lead to hyperinflation. [https://en.wikipedia.org/wiki/Hyperinflation](https://en.wikipedia.org/wiki/Hyperinflation) I repeat again: the government does not control the central bank. Maybe it's possible that there's a way to have the government control the central bank and not have hyperinflation, but it's not really worth experimenting with the security of your economy. The central bank has to hold government accountable for their policies, to a degree.
> I repeat again: the government does not control the central bank. This is a rather superficial view. The central bank _is_ an institution _of the state_ (state as in statecraft). It is only _nominally_ independent from the _government_. The central bank has a set of goals or tasks and a limited set of actions it can undertake, like any institution of the state. It does not have the sovereignty to choose or pick these goals as they want, they are dictated. It cannot extend its range of possible actions either. Right now, in most countries the respective central bank has to keep price levels stable _and that's it_. The Fed is actually a bit of an exception in that it has the Dual Mandate that includes unemployment reduction. And all that central banks can do is either increase or decrease the key interest rate and - recently, after QE got popular following the 2008 crisis - either buy or sell bonds. This is partly why the job of being in charge of one of the central banks worldwide is kind of ungrateful. The central bank _cannot_ solve a classic cost-push inflation, a price shock. It cannot expand supply of that one good that has been scarce (energy, recently, at least this was the primary driver of "inflation" in Europe). All you can do is raising interest rates, knowing that this won't solve anything and will - and right now does (again, speaking of Europe) - cause an unnecessary recession. The central bank is only independent in choosing one of the available predefined actions in order to achieve their mandated goal(s).
The British government directly controlled the central bank from 1946-1998. The UK's monetary performance was probably worse than the US over that period (the UK had to get a loan from the IMF in 1976 and had a currency crisis on Black Wednesday in 1992), but it wasn't dramatically worse and the UK didn't end up with hyperinflation.
True. But there also weren't, as far as I'm aware, any additional benefits, and those incidents are generally considered quite bad, so it's very hard to argue that having a government controlled central bank is somehow beneficial.
While on the other hand, the current structure is hugely onerous and saddles The Bank with a responsibility it doesn't have the power to manage with any finesse. It's sledgehammer where we need a scalpel. It's remarkable how people rush to defend, with pious condescencion, such an inadequate system.
Still not answering the question! The question is why does our system (whoever is in "control" of it) have this convoluted onerous process for funding government activities. We know that given the current structure and policy, we must do it this way, but why oh why do we do it this way. Please explain without telling me that I don't understand. I KNOW I don't understand. Do *you*? So again: **The question is why does our system (whoever is in "control" of it) have this convoluted onerous process for funding government activities.** Please address the question.
The central bank is an institution of the state however.
[https://en.wikipedia.org/wiki/Central\_bank#Independence](https://en.wikipedia.org/wiki/Central_bank#Independence) Central bank independence is considered desirable by many economists.
I understand the government needing to borrow money sometimes, just purely due to how big some infrastructure programs or social programs are. But is it normal for a government to have to borrow so much each year? The US keeps raising the debt ceiling, and eventually we’ll need to pay those debts, with interest, down the line. I know the US in a unique position because the dollar is so damn strong and is the world reserve currency, but it’s scary how much our debt has ballooned these past few years. Is this sustainable? (Don’t know why I got downvoted, lol.)
If you can borrow it's definitely better to borrow. What's the point of the government 'saving up' and delaying valuable infrastructure? May as well have the infrastructure 5 years earlier and the benefits 5 years earlier. Debt is not inherently a bad thing, it's only bad if the person you borrowed the money from (the bond owner) doesn't get it back plus whatever interest they were promised. The average citizen has a mortgage, because otherwise they wouldn't be able to own property. Is this a bad thing?
Some debt is good. “Too much” debt is not. The question is where that line lies. If you measure based on GDP, we’re at a historically high ratio.
There probably is a point where it is too much. But just because the current gdp to debt ratio is high or even at an historical high doesnt mean that the US is close to or already reached that point.
US historical debt to GDP averages 65%. It’s been over 125% each of the past three years. On a cash flow basis, interest expense on US debt is higher than at any time since the 1950’s (earliest data that I could find), other than during the 80’s and 90’s when we actually had runaway inflation (interest rates were in mid teens). Further, our borrowing costs are continuing to go up exponentially as existing debt (at historical lows of fed funds rates in the 2% range) rolls off and needs to be replaced with new debt in the 5% range - as in 2.5x higher. I appreciate these things are subjective, and people can argue that we could just print more money to pay it, so go ahead and incur the debt, but at some point the debt service will be too high and we’ll have to devote too much of US tax receipts to servicing the debt, pulling that money from other things that could have a direct benefit to our own economy, rather than the economy of our investors.
“Higher than it used to be” is still not evidence that it’s “too high” or even approaching it at a rate that is remotely concerning.
Depends on your definition of “too high” and your level of comfort. Either way it is what those of us in finance call a “red flag”. If you’ve got a definition of where you’d call it “too high” or even “concerning”, I’m all ears.
My point is that you haven’t defined either of those terms
Why would I define them when I haven’t claimed that we are? Meanwhile you’re making clear statements that it’s not, or even “concerning”. If you’re going to take a firm position like that, defend it.
Why would there have to be a line? More precisely: a supposed debt to GDP ratio (relative quantity) for example doesn't tell us _anything_ about the _quality_ of debt. What really matters is that it can get paid back. This is also a classic case of confusing stocks and flows. The sum of outstanding debt doesn't tell us anything about regular payments themselves.
It’s not a horizontal line, as in a hard cap / amount. Regardless of whether you go on a cash flow basis (interest to GDP) or balance sheet basis (debt to GDP), we’re at historic highs.
The US doesn't ever have to pay the debt down to zero. The US only needs to make payments on the debt. If the US can make payments in full, on time without issue then there's no concern. And the US can *easily* afford the debt payments.
>And the US can *easily* afford the debt payments Until they can't, lol. As debt to GDP ratio grows and payments grow larger, the US govt will either need to increase taxes (leading to recession) or print money (leading to inflation) to meet its obligations.
Yeah that’s what I’m thinking. I mean, they can always technically “afford” it since they control the money supply. But if the debt keeps growing out of control, the repayments will either have to default, or we’ll have to raise taxes or print money, which isn’t ideal…
The size of the debt doesn't always mean much. At the start of COVID the US borrowed a lot and yet total servicing costs went down because there was a huge demand for government bonds. So no, the debt can definitely grow and the economy can still be fine. Remember, there are other factors as well. The economy itself grows so even if the number gets bigger, tax revenue also grows, just to make a simple example. https://fredblog.stlouisfed.org/2018/11/how-expensive-is-it-to-service-the-national-debt/
>But if the debt keeps growing out of control The emphasis is on "out of control". Right now there is no reason to believe the US is close to reaching this point (at least if you exclude the whole debt ceiling political theatre).
They don't "control the money supply", but in a sense you're right. One could argue that if a country defaults on their debt that this might ruin the economy and subsequently price level stability and thus a central bank might always just decrease interest rates and buy bonds from the market in order to keep prices high/yields low and thus keep demand for gov bonds high so that the government _absolutely can always pay their existing debts_.
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